CENTRAL AND EASTERN
EUROPE

This section reviews the status of economic and agricultural
reform in Central and Eastern Europe and focuses more specifically on the
experiences of Bulgaria, Romania and the Russian Federation.

Economies in transition

The year 1992 saw further contractions in overall output in
the transition economies of Central and Eastern Europe. However, there were
significant variations in economic performance between countries, largely
reflecting differences in the pace and stage of their economic reform
process.

According to the IMF,39 real GDP in the Central
European countries 40 in 1992 declined by 7.5 percent, following a
13.5 percent fall in 1991. Forecasts point to a further 1.5 percent decline in
GDP in 1993 and a resumption of positive growth from 1994, initially at a rate
of 2.6 percent. Within this average, individual country positions differ
markedly, however. On the one hand, former Czechoslovakia, Hungary and Poland
are already showing signs of economic recovery, although the breakup of highly
economically integrated Czechoslovakia into two independent states, the Czech
Republic and Slovakia, has created additional uncertainty. On the other hand,
economic activity in Bulgaria and Romania continued to decline significantly in
1992, although at a slower rate than the previous year. The civil strife in
former Yugoslavia, SFR, a source of immeasurable human suffering, is at the same
time seriously disrupting the local economy and negatively affecting the
economies of neighbouring countries, especially Albania, Bulgaria and Romania.
The first of these is particularly vulnerable to destabilizing influences since
it only recently initiated economic reforms.

The recent economic performance and short- to medium-term
prospects in the newly independent states of the former USSR generally appear
bleaker than those of the Central European countries. According to the IMF, real
GDP in the area (including the three newly independent Baltic republics)
contracted by no less than 18.5 percent in 1992, compared with a decline of 9
percent in 1991 and 2.2 percent in 1990. GDP is expected to continue declining,
although at a decelerating rate: 11.8 percent in 1993 and 3.5 percent in
1994.

In most Central and East European countries, the agricultural
sector continues to be affected by the negative short-term impacts of reform and
the uncertainty surrounding privatization and future property rights. However, a
severe drought is probably the most important single factor behind the 12
percent drop in Central Europe's agricultural production in 1992, which followed
a decline of 4 percent in 1991 and of 3 percent in 1990. In the former USSR, on
the other hand, the decline in agricultural production in 1992 was limited to 4
percent, compared with 13 percent in 1991. A partial recovery in cereal
production, following the 28 percent drop recorded in 1991, almost offset
further declines in other crops and in livestock products.

As reported in The State of Food and Agriculture 1992,
the major policy areas affecting agriculture in Central Europe and the
former USSR include price and market liberalization, land reform, privatization
and demonopolization and trade liberalization.

The liberalization of prices is still the policy area in which
most progress has been made. Virtually all countries have taken significant
steps. Following measures already undertaken in this area by the Central
European countries, a price liberalization programme was carried out in 1992 in
Belarus, the Russian Federation and Ukraine, soon followed by Kazakhstan and
then the other newly independent states of the former USSR. In spite of these
efforts, complete liberalization has not been achieved and, in many cases, price
controls are still in place on a number of products, including some agricultural
and food products. In most countries, price liberalization, together with the
elimination or reduction of subsidies on farm inputs and products, has resulted
in a deterioration in agricultural terms of trade, as input prices have risen at
a quicker pace than farmgate prices. This tendency reportedly continued in 1992.
The significant shifts in relative prices following price liberalization as well
as the increased cost of and reduced access to credit following credit market
reform put pressure on the farm sector to increase productivity through better
resource use.

TABLE 5

Indices of agricultural production in Central Europe and
the former USSR

1985-89Average

1989

1990

1991

1992

CENTRAL EUROPE

Crops

110.3

112.5

106.1

103.8

83.9

Livestock

103.7

102.5

104.0

95.6

90.0

Agriculture

108.9

110.0

106.5

102.6

90.6

FORMER USSR

Crops

111.1

114.5

116.7

94.2

104.8

Livestock

118.6

125.6

125.8

116.9

101.7

Agriculture

116.4

120.6

120.2

105.1

100.6

Note: 1979-81 = 100.Source: FAO.

Progress has been slower in land reform because of the complex
legal and administrative procedures involved. Most Central European countries
already have the necessary legislation in place for reforming landownership
patterns and are in different stages of implementing it. The same applies to the
three Baltic republics. In most cases, the implementation phase has proved
longer than generally anticipated and the process of restructuring and
consolidation of landholdings is likely to be spread out over a number of years.
In the other newly independent states of the former USSR, progress is less
advanced and policy directions less clear but, in the Russian Federation, a
reorganization of state and collective farms was begun in 1992, involving both
changes in their legal status and the redistribution of land to private farming.
By 1 January 1993, there were reportedly about 400 000 private farms in the
newly independent states, of which about 180 000 were in the Russian
Federation.

Likewise, in the field of privatization and demonopolization,
which has a bearing on the upstream and downstream sectors of agriculture,
progress has been uneven. Significant steps have been taken, particularly in
former Czechoslovakia, Hungary and Poland, while other countries are progressing
at varying speeds and by different methods. Thus, in the Russian Federation a
voucher privatization scheme similar to the one applied in former Czechoslovakia
was introduced in 1992 and the distribution of vouchers to citizens was begun,
although subsequent progress has been slow. No less important than the
privatization of existing state enterprises, however, is the creation of new
private enterprises at all levels, a spontaneous process that has gained ground
in all the transitional economies. Available statistics point to steady
increases in the contribution of the private sector to GDP.

One serious problem emerging from the disruption of
traditional trading patterns is the risk of creating new barriers to
intraregional trade. The experience that followed the breakdown of the Council
for Mutual Economic Assistance (CMEA) risks repeating itself with the breakup of
former Czechoslovakia into two independent republics and with the disintegration
of economic relations between republics of the former USSR. Indeed, the future
role of the Commonwealth of Independent States (CIS) appears uncertain and, in
addition, the three Baltic republics and Georgia have opted not to join the CIS.
There are signs, however, that at least some of the transitional countries are
attempting to counter these negative developments and strengthen regional trade
relations. Thus, in 1992 the Czech Republic, Hungary, Poland and Slovakia
decided to constitute the Central European Free Trade Area, with effect from
March 1993. This constitutes a politically significant development, although the
agreement is not as far-reaching as originally hoped. Furthermore, trade
restrictions for agricultural products are set to be removed much more slowly
than for industrial goods.

Bulgaria

The agricultural sector

Agriculture is a moderately important sector of the Bulgarian
economy. It accounts for about 12 percent of GDP and employs 17 percent of the
labour force. Agricultural and food products account for about 20 percent of
exports and 7 percent of imports. Major crop products are grains (mainly wheat
and corn), sunflowerseed, tobacco, fruit (apples, grapes, peaches, plums,
cherries and others) and vegetables (tomatoes, peppers, onions, potatoes,
cucumbers). Major livestock products are pork, dairy products - mainly cheese
and yoghurt - and wool.

Throughout its history, Bulgaria has been a net exporter of
agricultural products. In a typical year, it exports wheat, tobacco, sunflower
oil, fresh and processed fruits and vegetables, wine and livestock products. It
imports oilseed meal, cotton and, in some years, maize. However, during the
communist period, about 80 percent of Bulgaria's exports went to the former CMEA
countries, with some 70 percent going to the former USSR. These export markets
have all but collapsed with the dissolution of CMEA trading arrangements and the
breakup of the USSR.

Under communism, almost 99 percent of Bulgaria's agricultural
land was organized into state and cooperative farms. In theory, state farms were
state-owned enterprises and the workers had the status of employees working for
fixed wages, while workers on cooperative farms were members and shared in the
profits of the farm. However, the distinction became blurred as the farm
structure was reorganized several times over the 40 years of communist rule.
During the 1970s the state and cooperative farms were consolidated into huge
agro-industrial complexes averaging 24 000 ha in size. Beginning in 1986, these
were broken up into smaller units and, during the final years of the communist
regime, the agro-industrial complexes were dissolved and the original
cooperative farms were reconstituted. The other type of farm organization is the
state-owned hog and poultry complexes.

The private sector consisted of plots, usually 0.5 ha in size,
which were allotted to cooperative farm members for personal cultivation. Such
plots accounted for about 16 percent of arable land. However, the private sector
accounted for about 25 percent of total gross output and as much as 40 percent
of total meat, fruit and vegetable production.

Both suppliers of inputs and purchasers of output were
state-owned monopolies, a typical feature of all communist regimes.

Policy reform

Retail prices. The government removed most retail price
controls in February 1991 but began a system of "monitoring" the prices of 14
basic food items. These included flour, bread, four types of meat, certain
sausages and other processed meats, vegetable oil and sugar.

In August 1991, the system of price monitoring was transformed
into retail price controls. Projected prices for the 14 food items were set to
cover costs and a "normative" profit margin was established at 12 percent for
processors and 3 percent for retailers. In April 1992, the list of monitored
foods was reduced to six: bread, flour, milk, yoghurt, white cheese and fresh
meat. The projected prices were raised at the same time.

Producer prices. Most producer prices were also
liberalized in February 1991. However, prices of wheat, pork, poultry meat,
calves and milk have continued to be under some form of control. In 1991, with a
view to monitoring prices, projected prices for these commodities were
established, covering costs plus a 20 percent normative profit. In April 1992,
this was replaced with a system of minimum prices for the same products. In
theory, both state-owned and private purchasing companies were required to pay
these minimum prices to producers. However, these prices were not so rigorously
enforced in the case of private firms.

Even the minimum prices established in 1992 are well below
world levels and the fact that average 1992 procurement prices were very close
to the minimum prices suggests that these are in fact being treated as price
ceilings. Furthermore, average 1992 prices of uncontrolled commodities such as
maize and barley are also well below world prices. Some of the reasons for these
low prices are:

· The monopsonistic
structure of the state-owned purchasing and processing enterprises. These are
technologically inefficient with high costs but, in the absence of competition,
they have no incentive to cut costs. Rather, they maintain their profit margins
by squeezing producers.

· The system of export quotas
and bans which are periodically in effect tend to hold down producer
prices.

· Because of the need to repay
credit and the lack of farmer-owned storage, producers are under pressure to
sell their crop immediately after harvest when prices are at their seasonal
low.

Trade policy. Trade liberalization began in 1990, when
the government removed the monopoly status of foreign trade organizations,
allowing private companies to engage in trade. Major reform took place in 1991.
In February a unified, floating exchange rate mechanism was established, based
on interbank bids for hard currency. Under this new system, firms can retain all
hard currency earnings which they may use for future imports. In early 1991 all
quantitative restrictions on imports were removed and import licensing
restrictions eased. The large number of export bans introduced in 1990 was
reduced to 21 items in March 1991 (mostly affecting basic food items to prevent
domestic shortages).

Despite the overall movement away from non-tariff barriers,
the government has introduced a series of temporary licensing and quantitative
restrictions on certain commodities, motivated by concerns about possible food
shortages. For most of 1992, exports of grain, sunflowerseed oil and other
strategic commodities were subject to quotas. In August, these quotas were
abolished and replaced with a system of export taxes, set to capture the
difference between domestic and international prices. Initially, these taxes
were 8 percent for barley, 12 percent for wheat and corn and 15 percent for
wheat flour. In January 1993, these were raised to 15, 20 and 25 percent,
respectively.

The result of the lifting of the export quotas was a dramatic
surge in exports. At least 600 000 tonnes of grain, including 313 000 tonnes of
wheat and flour, were exported in the last quarter of 1992, as traders took
advantage of the gap between domestic and world prices. These exports led to
fears of possible shortages. While there appear to be adequate supplies of bread
grains, there are signs of very tight supplies of feedgrains. In response to
such fears, the government imposed a ban on grain exports in March 1993, which
was to remain in effect until the end of September 1993.

Land restitution. The Law for Agricultural Land
Ownership and Use was passed in February 1991 and a series of amendments were
enacted in April 1992. The main provision of the law is to return land to the
pre-1946 owners or their heirs. According to the amended law, reinstatement will
take place within the boundaries of the original piece of land wherever
possible; in other cases, former owners will receive plots equivalent in size
and quality. The amended law allows land sales (the original law prohibited land
sales for three years following restitution) but imposes a maximum of 30 ha on
land acquired through either restitution or purchase. There are no restrictions
on leasing, however.

The process of land restitution is proceeding rather slowly,
as the municipal land commissions who are in charge of the restitution are
facing shortages of technically qualified personnel. As of April 1993, 22
percent of applicants had received temporary certificates of ownership, covering
about 15 percent of agricultural land. In spite of the difficulties, the
government hopes to be able to restitute 50 percent of the land within 1993 and
to finish the process by the end of 1994.

The amended land law also calls for the liquidation of
cooperatives. For each cooperative, municipal authorities have appointed a
liquidation council responsible for the valuation and physical distribution of
non-land assets to former owners and members and for the management of the
cooperative until its liquidation. For the valuation it must rely on the
services of individuals or companies authorized by the Privatization Agency or
the Ministry of Agriculture. Once members receive their share of cooperative
assets, they are free to pool those assets to form new cooperatives.

Privatization and demonopolization. The process of
demonopolization began in 1990 and accelerated in May 1991 when the Law for the
Protection of Competition was passed. In November 1990, most of the state trusts
responsible for purchasing and processing agricultural products were split up
into a number of independent enterprises which could compete with one another.
The actual effect of this action, at least for agriculture, was to set up
regional, rather than central, monopolies. Although all legal restrictions on
the formation of new private firms have been removed, few private firms have in
fact emerged to compete with the state enterprises to date. Thus, the market
power they hold in the upstream and downstream agricultural sectors
remains.

The May 1991 law extended the monopoly breakup across most
sectors and provided definitions for monopolies. It provides for price controls
on monopolies and bans acquisitions or mergers resulting in a monopoly. The
price controls are effected through regulations defining "normative profit
margins" for enterprises identified as monopolies.

The state-owned enterprises are to be transformed into
commercial companies, after which shares are to be sold through auctions or
tenders. The privatization process as such is, however, only in its initial
phase. Under the Ministry of Agriculture, 461 agro-industrial state enterprises
are destined for privatization. By June 1993, only a handful of auctions or
tenders for these companies had taken place.

Credit markets. Two major constraints facing both
private and cooperative producers are the difficulty of obtaining credit and the
high real cost of credit to farmers in view of the unfavourable relative price
movements they have experienced. While below the inflation rate, the current
nominal interest rate is still prohibitive for most producers, whose net returns
are increasing at a much slower rate than inflation. Banks are also reluctant to
lend in the current climate of uncertainty about future landownership.

The government has attempted to alleviate the situation
through several programmes, but without much success. In the autumn of 1992, it
offered to guarantee credit to finance planting costs, but no interest subsidy
was offered and producers were required to repay the loans immediately after
harvest, which forced them to market their crop at a time when prices were at
their seasonal low.

In May 1993, another bill was passed authorizing low-interest
credit to help finance the costs of spring planting. Banks that are still under
more than 50 percent state ownership are obliged to offer this low-interest
credit; the programme is voluntary for private banks. Even though the interest
subsidy is financed by the government, banks - including the state-owned banks -
are reluctant to participate because the credit is not guaranteed.

The impact of agricultural
reform

The immediate effect of reform has been to plunge Bulgaria
into a deep recession. GDP fell 17 percent in 1991 and another 10 percent in
1992. Further, a big external debt, estimated to be $13.5 billion, has been left
over from the pre-reform regime. In addition, Bulgaria was hit particularly hard
by the collapse of its important trade with the former USSR as well as by the
trade embargoes imposed on Iraq and later Serbia and Montenegro. Consumer prices
rose by 334 percent in 1991, mainly reflecting the February price liberalization
and administrative increases in energy prices. Inflation abated in 1992 but
remained extremely high at 110 percent. Unemployment in 1992 was estimated to be
15 percent as compared with 11.7 percent in 1991 and 1.6 percent in
1990.

The impact on agriculture. Since 1990, there have been
significant supply-side adjustments in the crop and livestock sector. Bulgarian
agriculture has suffered the same deterioration in terms of trade as the other
Central European countries: input prices rose by between four and eight times in
1991, while output prices merely doubled. This has been compounded by the
uncertainty surrounding land restitution and the liquidation of the
cooperatives. The other main factor affecting agriculture is the collapse of the
Soviet market.

The most dramatic adjustments have been in the livestock
sector. Between 1989 and 1992, cattle inventories declined by 38 percent, hogs
also by 38 percent and poultry by 51 percent. Livestock production has become
extremely unprofitable, as feed costs have risen while government policies have
combined with reduced consumer demand to hold down producer prices. The problems
have been greatest in the state-owned hog and poultry complexes, which continue
to depend on very expensive compound feed. Private livestock producers have been
quicker to adjust their feeding practices to the new economic reality, feeding
from their own grain production.

The livestock situation has also been deeply affected by the
liquidation of the cooperatives. Cattle have been affected by this process more
than other animals because the majority of cattle were on cooperatives rather
than state livestock complexes. The first cooperative assets to be disposed of
tend to be the animals. As a result, a large number of private individuals have
found themselves the owners of two or three cows. Many of the new owners have
not been able to provide proper housing or adequate feed. At the same time,
large-scale livestock facilities on the cooperatives lie abandoned. The result
has been a severe liquidation of herds.

There has been less of a visible adjustment in the crop
sector. Grain yields have fallen as a result of a decline in input use, the use
of low-quality seeds, drought and delays in planting. Wheat area, after falling
in 1992/93, should be back to its previous levels in 1993/94, despite continuing
low prices.

Maize area, after an increase in 1992/93, is expected to
decline significantly this spring, mainly because sunflowerseed has proved to be
more profitable. Sunflowerseed prices are higher and sunflowers are also easier
to cultivate. Bulgaria is subject to frequent droughts, causing a substantial
variation in maize yields. Much of the maize traditionally grown in Bulgaria is
in irrigated areas. As water and irrigation services have grown significantly
more expensive, producers have become reluctant to plant maize.

Fruit and vegetable production has suffered greater shocks
from the transition. Over half of Bulgaria's fruit and vegetable output went to
the processing industry while 80 percent of its processed production was
exported, mostly to the former USSR. With the loss of the Soviet market,
processing plants are working at one-tenth of their former capacity, leading to
a virtual collapse of fruit and vegetable marketing. The most evident result of
this situation is a 36 percent drop in vegetable production between 1989 and
1992, including a 53 percent drop in tomato output.

The negative impact on fruit production has so far been less
evident but a very negative trend is expected to emerge in 1993 and 1994. Much
of the land occupied by the orchards is in the southern part of Bulgaria where
restitution has proceeded quickest. As this land is restituted, the new owners
do not have the funds to apply optimal levels of pesticides or
irrigation.

Prospects and policy issues

It will probably be a long time before the shape of Bulgaria's
future farm structure becomes clear. A whole set of institutions is needed to
support the new private farmers. In the meantime, the government is under
pressure from the short-term negative effects of reform to slow down the pace of
reform and implement more interventionist policies. Bulgarian agriculture has
the potential to become a significant source of hard currency export earnings
but major obstacles remain.

Particularly pressing are the interrelated issues of land
restitution and liquidation of the cooperatives. It is feared that the thrust of
the current law will take Bulgaria back to its pre-Second World War farm
structure, dominated by tiny and fragmented farms. The average size of new plots
at the national level is about 0.5 to 0.7 ha. In the immediate future, it is
expected that the majority of landowners will want to form new and smaller
voluntary production cooperatives which will allow the pooling of fragmented
plots. In the long term, the problem of fragmentation should disappear with the
development of land markets. However, efficient land markets are hindered by the
lack of institutions needed to provide financing, brokerage services, surveying
and recording of transactions and by the lack of an information system. Land
sales are also slow because of the currently low profitability of
agriculture.

The liquidation of cooperatives is also creating great
uncertainty. There have been technical difficulties connected with the valuation
of assets and legal disputes about the allocation of assets to former owners and
cooperative members. Liquidation councils have been accused of incompetence and
negligence, resulting in poor preparations for sowing and planting
delays.

In the past, the cooperatives were responsible for many
essential services to agriculture, such as maintaining the irrigation systems
and ensuring phytosanitary controls on marketed produce. In addition, they were
the primary marketing channel for private sector production. As the cooperatives
are liquidated, no alternative channels are being developed to provide these
services. There is also an insufficient system of extension services to help
private producers make their production decisions, seek alternative marketing
options or form new cooperatives which might manage the irrigation system or
provide veterinary or other services.

Bulgaria has the potential to become a surplus producer of
wheat and livestock products. However, world market conditions could make it
difficult for the country to expand its exports. Even in 1992, the former USSR
was still the largest purchaser of Bulgarian grain (purchased under barter
arrangements for oil and natural gas). Bulgaria may have to continue to rely on
this market as the main customer for its wheat and livestock products, and these
exports will depend crucially on developments in the republics. If incomes begin
to rise, this market could expand. On the other hand, with successful economic
reform, the Russian Federation, Ukraine and Kazakhstan could emerge as serious
competitors for Bulgaria in the world wheat market.

Fruit and vegetables, the other major source of export
earnings, has been battered by the collapse of the Soviet market. Exports of
field tomatoes, unpeeled canned tomatoes and apples have fallen to a fraction of
their previous level. At the same time, exports of early tomatoes, greenhouse
tomatoes and green peppers have remained strong, with exports going mainly to
Germany and Austria as well as Poland, former Czechoslovakia and former
Yugoslavia, SFR. Markets could be developed for other greenhouse vegetables.
However, this potential is gravely threatened by the current difficulties of the
sector. The greenhouses are slated for privatization and are suffering the same
financial difficulties faced by state-owned firms. It is entirely conceivable
that some of the greenhouses could end up abandoned or destroyed.

The processing industry is in a particularly depressed state.
Plants are technologically outdated, they are often working at a fraction of
their capacity and they need a large infusion of capital to finance the
renovation needed to meet the quality standards of Western markets.

Romania

The agricultural sector

Agriculture accounted for 19 percent of Romania's GDP in 1991
and employed 29 percent of the workforce. By far the most important crops grown
in Romania are cereals, with wheat and maize covering about one-third of the
country's arable land. During the period 1986-90, wheat production averaged 7.3
million tonnes while maize production averaged 9.8 million tonnes. Other
important crops are oilseeds: sunflowerseed production averaged 700 000 tonnes
during 1986-90 while soybean production was typically around 300 000 tonnes per
year. The country's most important livestock product is pork.

Romania was for some time a significant net agricultural
exporter, exporting significant amounts of wheat and, in some years, maize.
Other major exports have been livestock products, sunflower oil, fruit and
vegetables. Throughout most of the communist period, Romania imported large
amounts of soybean and, in some years, maize. However, during the final years of
communist rule, the Romanian Government's drive to eliminate the country's
foreign debt led to greatly reduced imports of feedstuffs and the vigorous
promotion of agricultural exports. The result was severe domestic shortages of
most basic foods.

During the communist period, Romania's farm structure was
dominated by state and cooperative farms. State farms, averaging 5 000 ha,
covered 20 percent of agricultural land and 16 percent of arable land. These
were state-owned enterprises in which the workers had the status of employees.
Cooperative farms averaged 2 000 ha. Workers on cooperatives had the status of
"members" rather than employees and their income was theoretically linked to the
cooperative's performance. In practice, there was little difference in the
operation and management of these two types of farm. However, privatization of
the two types of organization is proceeding in different ways.

There was a significant private sector during the communist
period, however. About 9 percent of the agricultural land continued to be
privately owned, although this land was mainly in mountainous regions that were
unsuitable for large-scale collectivized agriculture. Another 8 percent of the
land was in 0.5 ha plots allotted to cooperative farm members for their personal
use. The private sector contributed close to 40 percent of the meat, fruit and
vegetable output.

Policy reform

Compared with other transitional countries in Central Europe,
the Romanian reform process has been characterized by a high degree of
gradualism and caution in an attempt to protect the population and limit the
recessionary impact of the structural reforms.

Retail prices. A first round of liberalization took
place in November 1990, when price controls were removed for all but a list of
22 essential items whose prices were fixed by the government and subject to
subsidies. Thus, staple foods, together with energy and communications, remained
under a price control system. In a series of steps during 1991 and 1992,
administrative price ceilings were raised, food subsidies paid to processors to
cover losses incurred through retail price ceilings were cut and the number of
products subject to price ceilings was reduced. From September 1992, formal
price ceilings persisted only for bread, butter, milk and milk powder. On 1 May
1993, the remaining formal retail price ceilings were lifted, leading to a more
than fourfold increase in bread prices. Yet food subsidies remain for beef,
pork, poultry and milk. These subsidies are paid to state-owned processors who
respect the government-established minimum farmgate prices.

Producer prices. Prices in peasant markets were freed
soon after the 1989 revolution, but the government has set minimum prices for
basic commodities to be paid by all state-owned purchasing enterprises. These
prices have been raised a number of times but, in general, have not risen as
fast as the rate of inflation. From 1 May 1993, minimum prices remained in force
for wheat, maize, pork, beef, poultry and milk. The continued de facto monopoly
power of the state purchasing enterprises tends to keep prices close to the
minimum levels. Privatization has been slow in the downstream sector and
producers still have very few alternatives to selling to state purchasing
agencies. The low profit margins of the state-owned companies and their
preferential access to state subsidies allows them to advance inputs and
financing to farmers in exchange for forward purchasing contracts; however, this
has resulted in de facto barriers to the entry of new private agents in
agricultural supply and marketing.

Trade policy. The government's first act following the
revolution was to ban all agricultural and food exports, reversing previous
policies of maximizing exports regardless of the effects on domestic food
supplies. At the same time, imports of crucial inputs were authorized. These
imports were initially possible because of the hard currency reserves that had
been built up during the previous year.

In 1991 most imports and exports were liberalized, although
export bans and quotas continued to be applied for many agricultural products.
The leu was devalued and made partially convertible, hard currency auctions were
authorized and the state monopoly on foreign trade was abolished. Beginning in
January 1992, exporters were allowed to retain their hard currency
earnings.

From 31 May 1993, export bans on agricultural products were
lifted, except for wheat and butter. Agricultural imports are subject to rather
high tariffs, although these are frequently waived for "emergency imports" in
response to perceived shortages.

Non-agricultural privatization. Small-scale
privatization began in February 1990 when a decree was passed that allowed the
formation of private businesses employing up to 20 people. The Commercial
Societies Law, passed in November 1990, removed most restrictions on the
establishment of new businesses. Also from this date, the leasing of state-owned
assets has been pursued. By the end of 1992, outside the farming sector, there
were over 200 000 private businesses in Romania (including both new private
firms and privately managed state-owned units) employing some 1.4 million
people.

Large-scale privatization began with an August 1990 law which
called for the reorganization of all state enterprises into either commercial
companies, in which the government continued to hold all the shares but which
are destined for privatization, or so-called regies autonomes, which were
to remain state property. Theoretically, the regies autonomes were to be
located in perceived strategic industries (defence, energy, mining, public
utilities). A law passed in August 1991 established the target of privatizing
the state-owned commercial companies within seven years. For this purpose, the
law created five private ownership funds, holding some 30 percent of the shares
of the commercial companies, and one state ownership fund, holding the remaining
70 percent. The state ownership fund will develop and implement annual
privatization programmes leading to complete privatization over seven years. The
five private ownership funds are joint stock companies in which Romanian
citizens hold share certificates. The funds are supposed to develop methods
whereby shareholders can exchange their certificates for actual shares in the
companies themselves.

The process of privatization itself is only in its initial
phase. In agriculture, the large-scale privatization programme will apply to
both state farms and companies in the upstream and downstream sectors, affecting
a total of 2 200 commercial companies. For 1993, 500 of these have been proposed
for privatization.

Land restitution. The redistribution of land began
spontaneously soon after the revolution, as cooperatives disbanded and members
divided their assets among themselves. Formal land legislation was passed in
February 1991, according to which cooperative members who contributed land, as
well as members who did not, are entitled to claim up to 10 ha, a quota
constrained by the availability of land. In areas with excess land, up to 10 ha
may be given to landless families from other localities who would then be
obligated to take up residence and cultivate the land. Most citizens are free to
buy and sell land, but no one may own more than 100 ha. There is a ten-year ban
on land sales by new owners who did not own land in the past. Foreign citizens
may inherit land but must sell it within one year.

Former owners whose land is now in state farms may not
reobtain that land. Instead, the 176 000 owners whose land was expropriated by
state farms have become shareholders in the state farms.

Romania's land restitution has proceeded more quickly than in
any other Central or East European country. By June 1993, 90 percent of
claimants had received land. Privately owned land increased from 1.4 million ha
in 1989 to 10.3 million ha in 1991 and now accounts for more than 70 percent of
Romania's agricultural land (80 percent of arable land). However, the process
has caused a return to the pre-Second World War farm structure which was
dominated by small, fragmented holdings. The average size of new private
holdings is about 2 ha, often consisting of two or more non-contiguous plots,
which is also a reflection of the pre-war farm structure. The return to this
fragmented farm structure has had a very negative short-term impact on Romania's
agricultural performance.

In the longer term, the consolidation of these holdings could
be accomplished through a land market. The sale or transfer of land requires the
seller to have the final title to his land, and the process of titling has been
very slow. Of the approximately five million new landowners, by mid-1993 only
300 000 had received final titles. The government expects that about 700 000
more will receive titles within 1993 and that, by 1995, 80 percent of new owners
will have final titles to their land. Would-be purchasers of land also find it
very difficult to obtain financing. Mortgages are offered at high interest rates
with a five-year repayment period.

Another serious problem faced by new landowners is the lack of
suitable machinery. Most of the country's tractors are still owned by the state
machinery stations known as "Agromecs". The 611 Agromecs own 70 000 tractors and
27 000 combines, while there are only 36 000 tractors in the private sector. The
government has introduced a soft loan programme, offering low-interest credit to
producers who want to buy tractors from the Agromecs. However, the fact remains
that many of the current tractors are too large to be used on small private
farms.

The formation of new cooperatives. To counter the
negative effects of land fragmentation, the government has actively encouraged
new private farmers to join associations. There are two types of association:
loosely organized groups, ranging from small "family associations" (typically
with three, four or five families) to somewhat larger but still informal
groupings and more formally structured, legally registered associations. In
several cases, farmers with several non-contiguous plots belong to two or more
such associations, which allow the pooling of adjacent pieces of land for joint
cultivation.

Agricultural credit. The government has undertaken
several initiatives to help farmers obtain credit, which continues to present
difficulties for most. Market interest rates of 70 percent or more are
prohibitive for most producers, given the low rate of increase in agricultural
prices. Most agricultural credit is provided by Agrobank. Before the revolution,
Agrobank had just 10 000 clients; now it has 150 000. It has also become
increasingly independent of the National Bank of Romania, on which it now
depends for only 27 percent of its resources. However, 80 percent of Agrobank's
loans are short-term and 60 percent are to Romcereal, the state grain company.
Agrobank also administers a soft loan programme on behalf of the National Bank
of Romania. These loans carry an interest rate of 15 percent and can be used by
producers to buy inputs. However, demand for these loans greatly exceeds the
supply: 23 billion lei were made available for this programme while applications
have been submitted for 250 billion lei.

The impact of economic reform

Romania has seen a decline in most economic indicators that is
no less severe than that of most other Central European countries. GDP declined
by 14 percent in 1991 and a further 15 percent in 1992. The inflation rate
accelerated from 161 percent in 1991 to 210 percent in 1992. Unemployment rose
from 2.7 percent in 1991 to 6 percent in 1992 and is still on the
rise.

Theimpact on agriculture. Agricultural output
declined by 14 percent in 1992 as a result of confusion regarding land
distribution, lower input use and the severe drought in the summer of 1992.
Declines were registered in most crops and livestock products. The cumulative
decline in agricultural production from 1989 to 1992 amounts to 25
percent.

Total grain production in 1992 was down by 38 percent. With
wheat area declining from 2.1 million to 1.5 million ha, production declined by
42 percent. Wheat was less affected by the summer drought - yields were down
only slightly from 1991 - than by disruptions caused by land redistribution.
Maize output, severely affected by the drought, declined by 35 percent. Planted
area increased by almost one-third, as the new private producers sought to
produce the feed necessary for their animals, but yields declined by 50
percent.

Oilseed production has undergone major structural shifts.
Sunflower area increased by 56 percent between 1990 and 1992, while soybean area
declined by 13 percent in the same period. As in Bulgaria, private producers
have found sunflowers easy to cultivate and they are relatively
drought-resistant. The communist government had strived for an increased soybean
output in order to come closer to self-sufficiency in feed production, but
yields remained low. Once freed from government directives, producers have
clearly lost interest in soybean.

The initial negative effects of land redistribution may now
have passed. Wheat area for 1993/94 is estimated to be 2.3 million ha, which is
back to historical levels. Maize area is expected to be very close to that of
1992/ 93 and sunflower area slightly higher.

Romania has suffered dislocations in its livestock sector
similar to those of Bulgaria. Cattle herds, being more difficult to keep on
small private farms, have declined the most - by 31 percent between 1990 and
1992. Hog numbers declined by 16 percent in the same period because of the
country's inability to import sufficient maize or soybean meal. Milk production
declined by 14 percent from 1990 to 1992.

Prospects and policy issues

Romania may be suffering some of the worst disruptions
compared with any country in Central Europe, with the exception of Albania. The
fact that Romania, once a major exporter, had to import more than 1 million
tonnes of cereals in 1990, 1991 and 1992 is an indicator of the magnitude of the
problems it is facing. At the same time, inflation continues to be high,
large-scale privatization is proceeding slowly and the government seems to be
more hesitant than others in the region to implement reform fully. Still, such a
cautious approach has not spared Romania the disruptions and severe, immediate
recessionary impact also experienced by the region's other reforming
countries.

Romania has the potential to become a significant exporter of
several agricultural products but the realization of that potential will depend
on the government carrying its reform programme through completely. Romania
clearly illustrates the problems involved in rapid privatization without the
simultaneous creation of the institutional infrastructure needed to support the
new private sector. One of the most pressing needs appears to be an acceleration
of granting final titles to restituted land. Without permanent title, landowners
are unable to sell their land and contribute to the consolidation of
landholding.

Another important need would be the development of a greater
diversity of marketing and input supply alternatives. Most purchasing and input
supply is still in the hands of costly and inefficient state-owned monopolies
which maintain their profit margins by holding down prices paid to producers. In
this context, an important contribution could be the development of a more
extensive network of cooperatives. The associations currently being encouraged
are production cooperatives, which pool adjacent pieces of land to achieve more
efficient cultivation. These associations, however, are still at a serious
disadvantage when dealing with input suppliers or procurement organizations.
There appears to be a need for marketing and input cooperatives in addition to
the current production cooperatives.

The development of better extension and information systems
would also play a positive role in improving the prospects of Romanian
agriculture. Present efforts are aimed at improving the structure of information
transmission as regards channels of distribution, market information and
agricultural production forecasts.

The development of Romanian agriculture could also be greatly
enhanced by the removal of remaining export restrictions, which hold down
producer prices and ultimately inhibit supply. If Romania wishes to reduce or
turn around its negative trade balance, it will eventually have to encourage
exports. Agriculture is one of the sectors with the greatest potential to
generate export earnings in the short term.

The Russian Federation

Food supply

During the 1980s the growth in agricultural production was
double that of population, with the livestock sector showing particular
dynamism. Average incomes, however, increased even faster than agricultural
production with the result that, although average per caput consumption grew,
food demand - especially for animal products - continued to exceed supply. This
prompted leaders of the former USSR to put increased food production high on
their economic policy agenda. However, the inefficiencies of the production and
marketing systems necessitated high and increasing subsidization and rendered
evident the need for reform.

The urgency of reform became imperative by 1990 when
agricultural production began to shrink, accentuating the supply/demand
imbalance and rendering even more manifest the shortcomings of the country's
marketing and distribution systems. The excess demand situation persisted
through 1991 but was reversed in 1992 when consumer prices rapidly increased
following partial liberalization, causing a contraction in the demand for foods.
In the case of animal products, the reaction of the processing industry was to
reduce meat and milk purchases from farms instead of lowering their sales
prices. Underlying the increasingly precarious overall food demand/supply
balance was a significant reduction in consumption, particulary of livestock
products.

A parallel phenomenon that may have mitigated the imbalance of
the food economy to a certain extent was the slowing in population growth which,
from 0.7 percent annually up to the late 1980s, was expected to turn negative by
1992. This reversal was linked to the deterioration of living conditions and
fears and uncertainties arising from the recent economic and political
transformations.

As regards food consumption patterns, official estimates for
the first quarter of 1993 indicate declines in per caput consumption below the
level of the period January-March 1989 (the most favourable among recent years)
of 21 percent for meat products, 34 percent for milk products, 7 percent for
eggs, 5 percent for fish products, 13 percent for sugar and confectionary and 32
percent for fruit. On the other hand, consumption increased by 22 percent for
grain products, 4 percent for potatoes and 8 percent for other vegetables during
the same period.

Consumption of animal proteins, which had already fallen
slightly in 1990 from the levels of 1989, seems to have declined further by
about 20 percent during 1991 -92. These were proteins partially substituted by
starchy foods. Overall, per caput calorie intake fell to about the level of the
1970s, although other estimates point to even lower figures.

Although average food intakes still appear relatively high,
considerable pockets of malnutrition emerged among less favoured regions and
population groups. Food access problems were accentuated by the reduced control
on farm marketing operations and barter deals as well as by the regionally and
locally different systems of fixing and/or subsidizing consumer prices for some
foods (the latter measure having been legalized by a presidential decree of 27
March 1993). Price differentials among cities remained wide, despite some
reduction over time which was probably caused by the response of economic agents
to the opportunities for arbitrage that such a situation offered. By the end of
March 1993 the discrepancies between the highest and lowest levels of consumer
prices among cities were 1:70 for bread, 1:34 for milk, 1:16 for beef and 1:10
for vegetable oil, potatoes and other vegetables. Even those groups of the
population that were less affected by the unequal distribution of food supply
still experienced a deeply felt qualitative deterioration in their
diets.

The overall situation may nevertheless be less gloomy than
suggested by the official statistics to the extent that these do not comprise
the unknown quantities of food that is privately produced and sold outside the
official sphere in more or less legal ways.

Agricultural production in
1992/93

Agricultural production was estimated to have fallen by about
6 percent in 1992, with meat, milk and egg output decreasing by as much as 12 to
15 percent.

Among individual crops, only cereals, pulses and potatoes
recovered substantially from the setback of the previous year. The area under
grain expanded slightly in 1992 to 62.4 million ha and still further in 1993. Of
significant bearing on animal feed supplies was the decline in pasture, from
28.8 million ha in 1986 to 23.3 million ha in 1992.

One of the factors limiting the growth of crop yields is the
degradation of soils. This process has been going on for more than 100 years but
Russian soil scientists point out that it has greatly accelerated during the
past ten to 20 years.

The explanatory factors include widespread neglect of
anti-erosion techniques, insufficient crop rotation, soil compaction through
overuse of heavy machinery, an unbalanced use of mineral fertilizer and
salinization through excess irrigation and insufficient drainage. The
detrimental effects are difficult to quantify but are commonly recognized to
weigh heavily on potential yield growth.

In 1992 total livestock numbers declined by 5 percent for
cows, 6 percent for other cattle, 11 percent for pigs and 9 percent for sheep
and goats. The decline on collective and state farms was only partially offset
by increases in private farms. Up to 1991, the rate of decrease in the overall
herd was smaller than that of meat and milk output, thereby implying slowly
rising animal productivity. For 1992, however, the official statistics report
diminished productivity.

Herd numbers and animal production further declined during the
period January-March 1993 and will most likely continue falling for the rest of
the year, although perhaps at a slower pace than in 1992 thanks to higher
government procurement prices. Shortages and/or high prices of feed remain the
major reason for this decline.

The 1992/93 agricultural year started with autumn ploughing
and sowing being reduced by one-fifth compared with normal rates, but with
moderate frost-lifting of grain. Depending on summer and autumn weather, crop
production in 1993 could improve slightly over the results of 1992 yet will not
compensate for the decline in livestock production. Overall, agricultural
production is likely to decrease by 5 percent or more.

Agricultural policies

Agrarian reform is generally perceived to be a prerequisite
for enhancing growth of agricultural production, balancing demand and supply,
raising nutrition standards and improving the performance of downstream
activities linked to agriculture.

The conceptual and operational implications of reform are
loosely defined by such slogans as restructuring, marketization and plurality of
socio-economic formations. There are strong divergencies of opinion as to the
nature, speed and depth of the process.

The institutional instability surrounding agrarian affairs is
illustrated by the fact that the Centre of Land and Agro-industrial Reform was
created in June 1992 and subsequently abolished in May 1993. Various government
agencies and regional authorities are influential in implementing reform laws
and decrees in their own ways. Another actor, represented in most provinces and
counties, is the Association of Peasant Farms and Cooperatives of Russia
(AKKOR).

Reorganized and new farms. There is general
agreement that, in the foreseeable future, the bulk of primary food products
will have to be generated by the collective and state farms, whether in their
traditional form or after reorganization. In 1992, their share in gross output
was some 60 percent and that in marketed output even larger. However, a new
sector of family and private "peasant farms" is coming into existence, although
it still accounts for a minor part of the country's agricultural
output.

Yet, how fast should private farming expand and what should be
its relationship with collective and state farms? Should the latter remain as
huge as in the past or be broken into smaller but still large (by Western
standards) units? The farmers remaining on the reorganized state or collective
farms shall be awarded shares in assets and land, but should such shares be
assigned in physical or in value terms? Although a number of laws, decrees and
ordinances have been issued on these and other questions, they are still
disputed and implemented locally in different ways.

In principle, private full ownership is already granted by
law, but the selling or buying of privately owned farmland for non-agricultural
purposes remains prohibited by law and constitution. In late 1992, full private
ownership was finally granted by law only for garden and household plots, and
two corresponding constitutional amendments were also approved.

Reforming and privatizing the huge public farms while
minimizing losses and disruptions is no less important than setting up new
individual farms. Disagreements exist as to the speed, depth and form that these
parallel processes should take.

Up to the end of 1992, out of a total 25 609 collective and
state farms, 19 719 were "reregistered". Thirty-five percent of these kept their
previous status while 65 percent reorganized in "other forms of ownership". The
majority of the latter (8 551) became "societies" with limited liability or
"mixed societies", while another 2 410 formed "agricultural (production)
cooperatives" and "associations of peasant farms". Some split into smaller
cooperative units, among which a number evolved into what can be considered
wholly independent peasant farms. Overall, the extent to which the reorganized
farms can be considered private is a question of definition.

During 1992, 134 700 new family and private, small group farms
came into existence, bringing the total to 183 700 by the end of the year. As
most of them were set up after spring 1992, their contribution to that year's
agricultural output was only 2 to 2.5 percent. Up to mid-1993, their number grew
to more than 250 000 and they farmed about 10.4 million ha or 5 percent of the
Russian Federation's agricultural land. The average area per farm was 43 ha.
Family and private farms have begun to organize cooperatives for buying, leasing
and servicing machinery as well as for processing, marketing and banking.
Forming such cooperatives is often made difficult by the absence of relevant
legislation, which leaves them in a semi-legal status. Moreover, the small
number of private farms that usually exists in a given locality is not
sufficient to support viable cooperation.

The sector of household plots and gardens has greatly expanded
in recent years in terms of quantity and value of output. Including the rural
"personal" plots, this private sector as a whole accounted for 80 percent of the
total output of potatoes (produced on 73 percent of their plantations) and 55
percent of the other vegetable output. Some reformers hope that the rural
household plot farming will expand, as it is a less costly and more realistic
way of establishing genuine family farms.

Price parity. Another major economic as well as
political bone of contention in 1992/93 was price policy. Advocates of
intersectoral equality want agricultural producer prices to rise at a similar
pace to those of the industrial inputs. Nevertheless, the prices for such inputs
are estimated to represent only 25 to 40 percent of agriculture's production
costs. Labour, intrafarm or interfarm inputs, land, management (or organization
of farming) account for the greater part of these costs.41 In any
event, it is unlikely that an alignment of price increases between agricultural
output and industrial input would by itself greatly help agriculture or reduce
the need for greater efficiency within the sector.

41 Land, long denied as a cost factor,
was at last indirectly assigned a price, although a low one, with the
introduction of land taxes, rents and limited selling and buying of land in
1991.

During 1991, the state roughly doubled the industrial input
prices for agriculture and the practice of applying contractual prices expanded;
at the same time, prices received by farmers rose by one-half and
more.

On the whole, domestic terms of trade developments in 1991 and
the first rime months of 1992 did not appear to penalize agriculture unduly.
Indeed, industrially produced inputs had previously been supplied at extremely
low costs.

The issue became worrisome only in late 1992 when prices of
industrially produced inputs and services were largely liberalized. During the
last three months of that year input prices rose 3.3 times faster than
agricultural output. The wholesale prices for industrially produced inputs rose
1.9 times during the first quarter of 1993, with a 2.1 -fold increase for trucks
and tractors and a 2.4-fold increase for mineral fertilizer and feeds.

No less detrimental to farmers than the increases in input
prices as such were the delays (frequently extended over several months) in
payments for agricultural products as well as in credits and inflation
compensations. More recently, these delays were somewhat shortened by all
payments being made through the country's central bank. Still, given the above
price increases, a one-month delay alone means roughly a 25 percent value
decline of the money available for input purchases. However, in most cases
industry and services demanded immediate or even advance payment.

In early 1993, the Russian Federation Government made an
effort to re-establish "price parity" and to compensate at least partly for the
effect of payment delays. A decree of 23 January 1993 provided for several forms
of financial support for the food economy, including compensations of 30 percent
on input cost rises. Following the decree, the government sharply raised the
1993 procurement prices for all categories of farmers producing grain, oilseeds
and sugar beet.

Procurement prices for grain which, in August 1992, were
fortyfold more than the average prices for 1990, were again more than doubled in
February 1993 and raised slightly further in March. The new prices are to be
revised every three months in the light of changes in input prices and
production costs on the basis of negotiations between the Ministry of
Agriculture, the state purchasing organization and the "Agricultural Union".
Moreover, half of the price will be paid in advance on conclusion of a sales
contract. By April 1993, milk was paid roughly twice, and meat about ten times,
the price of grain.

State purchases now only account for the smaller part of the
marketed farm output and their importance varies greatly by region. Even so,
they may help maintain minimum price levels in the case of excessive declines in
market prices. Whether budgetary constraints will allow the state to honour its
purchasing commitments fully is a different question.

From the late 1980s, the state began reducing its role in food
marketing and distribution. Even though 1992 was a relatively good harvest year,
state procurement of the main crops was much smaller than during the period
1986-1990. Nevertheless, procurements exceeded planned targets for most major
products except grain and potatoes. A decree of 17 December 1992 requires that
each region should aim at creating its own grain fund and subsidizing the
consumer price of bread. For 1993 planned purchases through the central fund are
only 12.6 million tonnes of grain, 2.6 million tonnes of potatoes, slightly more
than 1 million tonnes of meat and 6 million tonnes of milk.

Since 1991, collective and state farms have been permitted to
sell part of their livestock products through their own marketing organizations.
Such sales were small in 1991 but, by 1992, amounted to roughly 20 percent of
total meat output. Another 30 percent is produced privately with only a small
part sold to state agencies, mainly through the collective and state farms.
Thus, about half of the meat output is self-consumed or marketed outside the
official trade system. The corresponding percentages are smaller for eggs and
milk and larger for potatoes and vegetables.

By a decree of 12 February 1993, the state president requested
that central and regional public food funds should guarantee adequate food
supplies to some zones which, because of adverse climatic conditions or
population size, are not self-sufficient. Beneficiaries are Moscow and St
Petersburg, a number of northern and industrial zones, the army and some other
state organizations. Purchases to this end are to be effected on the basis of
voluntary contracts, partly through privatized trade organizations on behalf of
the state. Purchases abroad and from states of the former USSR are also to
contribute to the central fund.

Barter operations and foreign
trade

The reduced role of central purchases has not yet given way to
a functioning market, but a primitive form of market is operating under
galloping inflation and with some remnants of the former command economy. In
1992 food processing was still largely a monopoly of state-owned firms. Sugar is
a special case: part of the refined sugar output is returned to the beet
producers on the basis of contracts while another smaller part is retained by
the refineries, thus being consumed and marketed outside the state system.
Similar practices are observed for mixed feed.

The volume of free grain trade in 1992 is estimated to be
around 15 percent of production, with 2 percent going through the commodity
exchanges (birzhy). Barter trade among farms, non-industrial enterprises
and territorial administrations has expanded. An example is the "barter fund" of
Vologda province, which exchanges metal, timber and machines for animal feeds
and other foods from Kazakhstan and some Russian provinces. Throughout the
Russian Federation, many farms barter meat and other farm products in exchange
for needed inputs. About 30 percent of industrial farm inputs are estimated to
be acquired outside the parastatal AGROSNAB system, and this share is expected
to reach 45 to 50 percent in 1993 and subsequent years. Such transactions, even
where legal, are only officially recorded in part.

Up to autumn 1991, food trade among the republics of the
former USSR was only recorded for individual republics and was not published
systematically. The first statistical yearbook, published by the Russian
Federation, contained data on main food commodity imports and exports from
former Soviet republics without a breakdown by trading partners. Most likely,
these data only cover exchanges through state-owned firms and the procurement
system using public funds. Apart from grain, former Russia's agricultural
imports from other republics in 1989 consisted mainly of meat and meat products
(876 000 tonnes), milk and milk products (4.5 million tonnes), 847 million eggs,
3 million tonnes of vegetables, fruit, grapes and melons and 2.6 million tonnes
of sugar. On the other hand, former Russia's deliveries of these products to
other republics were negligible, except for eggs and potatoes. Since then, the
quantities (including those from Georgia and Baltic states) have greatly
declined. Even the reduced agreements concluded for 1991 were not
fulfilled.

The main suppliers of meat and milk were Ukraine, the Baltic
states and former Belarus. Ukraine also supplied most of the eggs and former
Belarus most of the potatoes. Central Asia, Ukraine and Moldavia were the main
suppliers of vegetables, fruit and melons. The main supplier of grain from
within the former USSR to Russia was and still is Kazakhstan.

The above refers to the so-called "near abroad" as distinct
from "far abroad" trade, the latter referring to trade vis-à-vis
countries outside the former USSR, which now include the three Baltic states.
For grain, the Russian Federation heavily depends on imports from far abroad,
the other most important import items being sugar, meat, vegetable oil and
oilseed meal. According to official data, far abroad wheat imports in 1992
increased from 12.4 million tonnes in 1991 to 20.6 million tonnes, but maize
imports were more than halved from 11.8 million tonnes to 5 million tonnes. Far
abroad imports of meat in 1992 decreased to 380 000 tonnes (in 1991 they were
693 000 tonnes) while those of vegetable oil increased fourfold, from 108 000 to
452 000 tonnes, and those of sugar from 3,6 million to 4 million
tonnes.

Barter trade operations are also reported between territorial
administrations and partners far abroad, e.g. between St Petersburg and Poland
or Hungary; or the Ufa oil and Vorkuta coal vis-à-vis Lithuanian
meat.

Prospects for agriculture

It will not be before two or three years, perhaps even more,
that the 1986-1990 farm production levels can be expected to be reached again.
This applies more to the livestock sector where rebuilding the animal herds will
take time. One may even question whether regaining earlier output levels should
be a primary goal. Rather, the emphasis may be shifted to: i) better
integration of downstream activities linked to the food sector; and ii)
adjusting to the changes in consumer demand that may be expected when real
incomes recover - although regaining their previous level may be an even
lengthier process.

Renewed growth in agricultural output will probably be sought
by increasing productivity without raising capital and labour costs per unit of
output. Cost reduction, even more than physical growth objectives, could become
the main contribution of the new individual farms. The collective and state
farms and their reorganized successors still have to prove their ability to
render this service to the food economy, all the more so since direct and
indirect subsidization of agriculture is growing again. To this must be added
the cost of higher state purchase prices and the subsidies on livestock products
in 1993 as well as central and local consumer subsidies. If agriculture does not
reduce its production costs, it will remain a major factor of inflation and,
thereby, become increasingly a factor of economic distortions itself.

The solution of these problems in the long term will require
the settlement of currently conflicting views among policy-makers, from top to
local levels. Political and economic uncertainty are the greatest obstacles to
the reform and recovery of the Russian Federation's agriculture.

OECD COUNTRIES

Overview

The OECD countries' policy actions in agricultural trade and
the macroeconomy affect the welfare of the developing countries often as much as
or more than these countries' own policies. The combined macroeconomic policies
of the developed countries have a heavy influence on the global economic growth
and inflation rates, interest rates, exchange rate structure and, therefore, the
levels of trade and capital flows among countries. The domestic agricultural and
agricultural trade policies of the developed countries also strongly influence
the well-being of developing countries' agricultural sectors and rural
communities. For these reasons, The State of Food and Agriculture reports
each year on changes in the world economic environment in its World review, and
on changes in the agricultural and trade policies of OECD countries in its
Regional review.

The State of Food and Agriculture 1993 highlights some
of the likely impacts of the reform of the Common Agricultural Policy (CAP) of
the European Economic Community (EEC), having reported on the CAP reform
measures in 1992. With a new administration and agricultural legislation (which
expires in 1995) in the United States, the relevant section raises some of the
major issues and likely options that will be considered in adjusting United
States agricultural policy to changing realities. Finally, as the world's
largest net importer of agricultural products, Japan has announced a sweeping
agricultural policy reform package. The section on Japan highlights the changes
taking place in the country's agricultural sector, both as part of and apart
from the announced reforms.

United States

The budget deficit and its impact on
agricultural policy

A new administration, committed to increased economic growth
and a phasing out of the budget deficit has taken over in Washington, DC. The
major preoccupation has been how the new austerity programmes to reduce the
budget deficit will affect different societal and economic groups, including
agriculture. The changes and shifts in direction of agricultural policy that are
likely to occur over the next several years are important to United States
agriculture but they are no less important to the global community, since that
country's agriculture plays a predominant role in the global agricultural arena.
Following is a brief analysis of the general consequences of possible changes in
United States agricultural policy in the coming months and years.

A desire to reduce the government's budgetary deficit has led
the United States administration to propose a package of measures to Congress,
aimed primarily at cutting government expenditures and increasing revenues. Some
of the measures would modify existing agricultural programmes, while other more
general actions, such as those proposed in the area of tax policy, would affect
agriculture as part of the overall economy. The administration proposed phasing
in the agricultural reforms from FY 1994 to 1997 and requested legislation to
make some of the changes immediately while leaving others until the 1995 farm
bill.

The administration's agricultural proposals represent an
adjustment of programme mechanisms rather than a fundamental change in the form
of farm programmes. Even the measures proposed for inclusion in the 1995 farm
bill do not imply a radical change in structure, although they conceivably could
prompt consideration of more fundamental reforms. Under the current proposals,
the target price/deficiency payment mechanism for supporting farm incomes
remains in place, as do the loan rate and production control mechanisms for
supporting prices. The administration explicitly ruled out an early reduction in
export subsidies on the grounds that it would not be appropriate to "disarm"
unilaterally before the issue was resolved in GATT's stalled MTNs.

The two changes that would have the greatest budgetary and
programme impact, and which would become effective for 1996 crops, are: an
increase in the mandatory area from which production is not eligible for support
payments under the so-called "triple base" programme42 from 15 to 25
percent of base acreage; and the elimination of the so-called 0/92 and 50/92
programmes. Under the 0/92 programme for wheat and feedgrains, producers may
plant from 0 to 100 percent of their acreage eligible for production support
(payment acreage) but still receive deficiency payments on 92 percent of that
payment acreage without suffering a reduction in the farm's future programme
acreage base. The benefits are calculated in the same way for rice and upland
cotton, except that farmers must plant at least 50 percent of their payment
acreage (50/92).

42 See The State of Food and
Agriculture 1992.

Eliminating the 0/92 and 50/92 programmes would require
farmers to return the acreage currently under these programmes to production in
order to receive programme benefits. This would reduce the partial decoupling
accomplished by the 0/92 and 50/92 programmes and the resulting increase in
production may need to be offset by increases in Acreage Reduction Program (ARP)
levels.

Eliminating these programmes may also affect farmers'
decisions concerning the Conservation Reserve Program (CRP). Many CRP contracts
will begin to expire in 1996. What will owners do with this land then? Until
now, the likely choices have included a renewal of the CRP contracts; the
continued idling of some or all of that land, but under the 0/92 and 50/92
programmes; or the return of the idled land (for which farmers retain a base) to
production. Elimination of the 0/92 and 50/92 programmes would remove one
option, and there is uncertainty about the CRP renewal option.

It is unclear whether or not Congress will honour the new
administration's request for funding in 1994 and 1995 to enrol the additional 1
million ha in the CRP to meet the target set by the 1990 Food, Agriculture,
Conservation and Trade Act (FACT). How it may deal with reauthorization of the
CRP when its authority expires at the end of 1995 is also a question to be
considered. Some critics of the CRP have suggested that the $1.8 billion now
spent annually on CRP rental payments could be put to better use in other
approaches to conservation. The increased output which could result from the
elimination of these options might be offset by increases in the ARPs for
programme crops.

Other policy changes proposed by the administration with the
aim of achieving budget savings include: directing subsidies to farmers with an
off-farm income below $100 000; increasing loan origination fees and assessments
for certain programme crops; reforming crop insurance and disaster assistance
programmes; and phasing out subsidized sales of timber from public
lands.

The long-term implications of these proposals to cut the
United States federal budget may make the farm programmes less attractive to
potential participants. As programme benefits for farmers are further reduced by
the increase in mandatory flexible acres and the possible required increase in
ARPs (if the CRP and 0/92 and 50/92 programmes are eliminated), some farmers may
find it is to their advantage not to participate in the programmes. They would
still be able to take advantage of higher domestic prices for commodities as a
result of the programmes but, at the same time, they would be able to produce
whatever amount of any commodity they chose. The government would be less
effective in controlling the supply of a commodity, which is the mechanism used
in the commodity programmes to maintain price levels.

The CRP and other conservation measures in the farm programmes
have also provided a means for the United States Government to help control soil
erosion and pesticide runoff on farms. Participating farmers must meet certain
conservation requirements to be eligible for programme payments. With reduced
programme participation, the farm programme would be less effective in this
role. Without these measures to control the adverse environmental effects of
agriculture, the government would need to find new ways of responding to the
general public's growing pressure to regulate such issues. One likely result
would be new laws enacted by individual states as a means of control. Such laws
would vary by state and would therefore affect farmers differently depending on
the location of their farms.

Farmers still participating in the programmes may also be
adversely affected if increasing numbers of farmers choose not to participate in
the farm programmes. If supplies increase, programme pressure may be placed on
participating farmers to reduce their production further as a means of
controlling supply. Such control would be effected by increasing the level of
the ARP, which would further reduce the programme payments that a farmer could
receive and thus also reduce the incentives for participating in the programme.
The cuts may also have the opposite budget effect to that intended, since they
may actually increase government spending on farm programmes. An increased
supply resulting from programme changes would lower the market price for a
commodity while deficiency payments would rise as the difference between the
market price and the target price widened. The higher payments to participating
farmers would increase government expenditures, depending on how many farmers
remain in the programme and on the amount of increase in the payments.

The United States Government is committed to its export
programmes as long as similar programmes exist in other major agricultural
producer countries. Levels of assistance, provided under schemes such as Public
Law (PL) 480 and the credit guarantee programmes, are mandated by Congress and
will remain in effect through 1995.

If further increases in acreage ineligible for support under
the triple base were to reduce the number of farms participating in farm
programmes, a major challenge for the United States Government would be to
maintain levels of commodity stock in the Commodity Credit Corporation (CCC),
which is used to provide food assistance.

The long-term outlook for export programmes will depend on
budgetary issues facing the United States Government when the present farm act
expires in 1995. The amount of money appropriated to different export programmes
and food aid will depend on what pressures exist at this time with regard to
government spending. Programmes such as PL 480 are likely to continue at similar
levels. However, export programmes such as the Market Promotion Program may be
reduced. The future of the Export Enhancement Program (EEP) is more likely to be
determined by what happens at the GATT negotiations and by perceived competition
from other developed countries rather than by the budget.

The effect of the contemplated programme changes on decoupling
and market liberalization is unclear. Elimination of the 0/92 and 50/92
programmes would be a retrenchment from decoupling while the increase in
mandatory flexible acres ineligible for support payments from 15 to 25 percent
would enhance the decoupling process. Increased supply, including for export,
from lower programme participation would lower prices in world markets and, to
the extent that this would precipitate further government intervention to
control supplies, the earlier movement towards market liberalization would be
reversed.

The recent situation and policy
developments

Situation. Relatively strong prices at planting time, a
relaxation of government planting restrictions and generally favourable weather
conditions led to larger harvests of nearly all major United States programme
crops, particularly maize, in 1992. Despite stronger exports, privately held
stocks of nearly all cereals (especially maize) - including the Farmer-Owned
Reserve (FOR) - grew during the 1992/93 marketing year. Government-held stocks
remained near the minimum needed to maintain the 4 million tonne Food Security
Wheat Reserve (FSWR) and to operate food relief programmes.

Export assistance. It was proposed that the level of
export credit guarantees be maintained at the same level in FY 1994 as in 1993 -
$5 billion for short-term guarantees, $500 million for medium-term guarantees
and $200 million for guarantees of sales to emerging democracies. The
administration's budget proposal assumes as much as $1 billion in EEP bonuses in
1994 compared with an estimated $1.2 billion in 1993 and $968 million in
1992.

Food aid. PL 480 food assistance was estimated to be $1
698.9 million in FY 1993 compared with $ 1 604.5 million in 1992. A reduction to
$1 618.1 million was proposed for 1994 as part of the administration's
deficit-reduction programme. The proposal for 1994 would finance an estimated
6.3 million tonnes of commodities, about the same amount as in 1992 but
approximately 200 000 tonnes less than was estimated for 1993. East European
countries are increasingly becoming recipients of United States food aid under
PL 480 Title I credit sales, accounting for 37 percent of the 2.5 million tonnes
of commodities that had been allocated as of mid-May 1993. In addition, the
United States in April 1993 pledged $700 million (including $200 million for
transport costs) to the Russian Federation: this was to finance $433.5 million
in credit sales of agricultural commodities and $66.5 million in donations under
the Food For Progress (FFP) programme. An additional $194 million is to be used
for direct food aid donations provided under the Section 416(b) surplus disposal
programme and FFP programme.

European Economic Community

Common Agricultural Policy
reform

The State of Food and Agriculture 1992 presented an
overview of the main elements of the Common Agricultural Policy (CAP) reform,
approved in June 1992. This section views the reform package in the context of
the problems it intends to address and the effects it is expected to have in the
coming years.

The reform of the CAP constitutes a response to a series of
problems that had been building up within the European Economic Community (EEC)
over a number of years. The price-driven support system was leading increasingly
to overproduction, as a continuously expanding farm output was outstripping
demand. The budgetary costs associated with the disposal of increasing surpluses
through stockpiling and export subsidies had continued to grow steadily in spite
of virtually static producer prices since 1985. Attempts to cut costs and curb
surpluses throughout the 1980s had proved insufficient. Furthermore, in spite of
the high budgetary costs of maintaining the price support system in addition to
the costs borne by consumers through higher prices, it was felt that the CAP no
longer provided the desired support to farmers, particularly small farmers and
those in less favoured regions, who were unable to take full advantage of more
intensive production methods and, therefore, to benefit from the price support
mechanisms in the same way as larger farming units. Indeed, prior to reform,
more than 80 percent of EEC spending on agricultural support went to less than
20 percent of the Community's farmers. An additional problem in many areas of
the EEC was the overexploitation of land with intensive fertilizer
use.

The specific elements of the reform package agreed in 1992
were presented in greater detail in The State of Food and Agriculture
1992. The agreed reforms will be phased in gradually over the marketing
years 1993/94, 1994/95 and 1995/96. When fully implemented, the reforms should
have a major impact on EEC agriculture, at once affecting production, farm
incomes, farm structures and the environment.

Farm production

Farm production will be affected by the various changes in the
market regimes as well as by some of the accompanying measures such as the
afforestation and environmental programmes. For arable crops (cereals,
oilseeds and protein plants), various elements in the reform package will have a
limiting effect on production. This should be the case for the significant
cereal price cuts, which will bring the intervention price down to 100 ECU per
tonne by 1995/96, and the abolition of guaranteed prices for protein crops from
1993/94 (guaranteed prices for oilseeds were already abolished from the
marketing year 1992/93).

In addition, the set-aside requirements for producers to
qualify for the direct payments designed to compensate for the price cuts will
have a limiting effect on the production of arable crops. The initial set-aside
requirement has been fixed at 15 percent of arable cropland on a rotational
basis, but this can be modified yearly in the light of the market situation.
Small farmers who produce less than 92 tonnes of cereals will, however, be
exempt from the set-aside obligation and will still qualify for compensatory
direct payments. Land devoted to arable crops may also be reduced through the
absorption of land by forestry as a result of the afforestation
programme.

The production of arable crops may be further reduced by some
of the elements in the new environmental programme; namely, measures to promote
extensive of crop production, long-term set-aside for environmental reasons and
the conversion of arable land into extensive pasture.

Although the total effect of all the above measures on arable
crops is very difficult to quantify, the Commission of the European Communities
(CEC) has attempted to estimate production for 1999. For cereals,
production estimates for 1999 were based on a hypothetical set-aside rate of 15
percent and the absorption of 1 million ha of arable land by the long-term
set-aside and afforestation schemes.

These assumptions signify a drop in total EEC cereal area from
36 million ha in 1991/92 and 35.7 million ha in 1992/93 to 33.3 million in
1999/2000. On the further assumption of yields stabilizing at the levels of
1991/92, total EEC cereal production in 1999/2000 is projected to be 167 million
tonnes compared with 181 million tonnes in 1991/92 and 166 million tonnes in the
drought-affected crop year 1992/93. If yields are assumed to continue increasing
at 1 percent per year (somewhat lower than the 1.8 percent annual increase
recorded over the last five years), production in 1999/2000 should reach 177
million tonnes.

Meat production will be affected mainly by the changes
in the beef regime and the decrease in feed prices following the cereal price
cuts. Beef producers will be directly affected by the 15 percent cut in
intervention prices but this will be counterbalanced by the decrease in feed
prices following the price cuts for arable crops. Farmers raising beef cattle on
grazing land will be compensated through direct payments in the form of
increases in the various premiums paid for livestock units. However, to
encourage extensive production, premiums will only be awarded for livestock
units not exceeding established maximum density limits (livestock units per
hectare of forage area). Smallholdings with less than 15 livestock units will,
however, be exempted from these limits. The impact of density requirements on
production may be somewhat limited, since exceeding the maximum density does not
imply forfeiting premiums on the entire herd, but only on the livestock units in
excess of the maximum density limit. As for other animal products, no
changes have been introduced to the marketing regimes for pork, poultry and
eggs, the producers of which, on the other hand, will benefit from the lower
feed prices. This should tend to stimulate production of these products and make
EEC producers more competitive.

Overall, CEC projections of meat production in 1999
reflect the expected impact of the reform on various products. Indeed, a
reduction is forecast for beef production, which should drop to 8.1 million
tonnes in 1999 from 8.7 million tonnes in 1991 and 8.4 million tonnes in 1992.
Pork production, on the other hand, is projected to reach 15.3 million tonnes in
1999 compared with 14.3 million and 14.2 million tonnes in 1991 and 1992,
respectively, while poultry production is projected to increase from 6.7 million
tonnes in 1991 and 6.9 million tonnes in 1992 to 7.8 million tonnes in
1999.

Milk production in the EEC is largely determined by
milk quotas, which are to be reduced by 2 percent if required by market
conditions. At the same time, the butter price will be cut by 5 percent.
Consequently, a shift is to be expected from butter production towards cheese
and fresh dairy products in line with present trends in the consumption of dairy
products.

Farm incomes and farm
structures

As for farm incomes, the impact of the price cuts in
the reform package will be offset by direct payments to farmers in the form of
compensatory amounts or premiums not related to current production. For arable
crops, the price cuts are designed to be offset by direct payments, provided
farmers comply with the annual set-aside requirements for land devoted to arable
crops. The compensatory payment, granted on a per hectare basis, will be
calculated regionally on the basis of the average of certain past yields (tonnes
per hectare) which will be multiplied by the compensatory amount (ECU per
tonne). Thus, per hectare compensation payments will vary between
regions.

The compensatory payment is designed to deliver, on average,
full compensation for the price cuts (or for the abolition of guaranteed
prices). However, compensation within each region will be biased in favour of
producers with yields below the regional average and who will be more than
compensated for the loss in their income caused by the price cuts. More
efficient producers with higher yields will suffer a loss. As for animal
production, the cuts in beef prices will be compensated by the reduction in feed
prices and by premium increases. The maximum density limits for premiums will
favour producers practising less intensive cattle production, while limits on
the total number of animals per herd eligible for premiums will limit payments
made to large producers. With no changes introduced in the market regimes for
pork, poultry and eggs, the lower feed prices may have a positive impact on
producers' incomes for these products, although increased production may lead to
lower margins.

Based on representative samples of holdings from the European
Communities' Farm Accountancy Data Network,43 the Commission has
simulated the effect of the reform on arable crop producers as well as beef and
dairy farmers.

43Agra Europe, 5 March
1993.

The simulations are static: they assess the impact of all
adopted measures at the end of the transition period when all measures are fully
operational and they assume that farmers do not adapt resource use and
production plans to the new incentives provided by the policy reforms. The
simulations indicate that, for all the considered types of dairy and cattle
farms, farm incomes expressed as farm net value added will increase as a result
of the reform. For arable holdings, the impact will differ according to the farm
size and small- and medium-sized producers will actually see farm incomes
increase. This should be true to a larger extent for small producers, with a
cereal production below 92 tonnes, than for medium-sized producers. On the other
hand, the largest farms, producing more than 230 tonnes of cereal, will
experience a drop in farm net value added.

In general terms, the reform of the CAP implies a closer
direction of farm support towards the smaller and less efficient producers,
although this effect is significantly less pronounced than it would have been
with the original reform proposals submitted by the CEC in 1991.

The effect of the reform on farm structures is not
clear-cut. Generally, one of the aims of the reform is to maintain the viability
of small family-based farms and to slow down the rural exodus. The somewhat
improved targeting of support towards this type of farm and more extensive forms
of agriculture will work to such an effect. However, the reform of the market
regimes is accompanied, inter alia, by an early retirement scheme which
aims at releasing land either for the enlargement of holdings to improve their
economic viability or for non-farm purposes.

CAP reform and the environment

The reform of the CAP is designed (and is expected) to have a
positive impact on the environment. Positive effects should be derived from both
the reform of the market regimes and the afforestation and the
agro-environmental action programme accompanying the market reforms. As far as
the reform of the market regimes is concerned, the price cuts will reduce the
incentives to increase production through intensification. In addition, there
are specific incentives to adopt less intensive production practices.

The afforestation programme in its turn will provide
financial aid to farmers who wish to use agricultural land for the development
of forestry. The financial support can cover: aid for afforestation costs; a per
hectare allowance to cover maintenance costs for afforested areas during the
first five years; an annual allowance to cover income losses resulting from
afforestation of agricultural land; and investment aid for the improvement of
woodlands. The precise impact of the programme is difficult to foresee and will
depend in part on implementation at the national level.

The agro-environmental programme has a broader scope
and will provide financial assistance for a series of measures aimed at
improving the rural environment.

These include:

· the adoption of
farming practices that reduce agricultural pollution;· the "extensification" of both
crop and livestock farming;· land use that is compatible
with the protection of the environment, soil and landscapes;· the preservation of local
breeds;· the upkeep of abandoned
farmland and woodlands where necessary for ecological and safety
reasons;· long-term set-aside of land
for environmental reasons;· the training of farmers in
environmentally friendly farming and in the upkeep of the
countryside.

As in the case of the afforestation programme, the precise
impact of the agro-environmental programme is also difficult to assess and will
depend on national implementation.

What the CAP reform does not do

Although the reform approved in 1992 will introduce
far-reaching changes to the CAP, it will not change some of its basic principles
and mechanisms such as common prices decided by the European Council of
Ministers, common protection against agricultural imports by the use of variable
levies, the use of export subsidies to render EEC products competitive on world
markets and public intervention in agricultural markets. Thus, the reform may
serve to reduce production and internal surpluses for some products as well as
levels of export refunds. However, because of reduced feed prices, the
production of pork, poultry and eggs will probably be stimulated.

Generally, however, the reform will not change the rules of
access for agricultural imports to the EEC market or for EEC agricultural
exports to the world market. For most products the preferential treatment of EEC
producers vis-à-vis importers on the internal market remains.
Insofar as the double pricing system stays in place, i.e. internal guaranteed
agricultural prices are set independently of world market prices, EEC farm
producers and consumers will continue to be largely isolated from price changes
on the world market as long as world market prices do not rise above the
internal guaranteed price levels.

Japan

An agriculture in transition

For the past couple of decades Japanese agriculture has been
undergoing a quiet revolution and the forces of change, both internal and
external, have been intensifying. In recognition of this mounting pressure, in
May 1991 the Ministry of Agriculture, Forestry and Fisheries set up a task force
to develop new basic policy directions to meet the changing situation and
challenges in the food and agricultural sector and in rural areas. In June 1992,
the ministry issued the task force's report, The Basic Direction of New
Policies for Food, Agriculture and Rural Areas, which it then adopted as its
future policy guidelines, submitting several bills and budgetary proposals to
the 1993 session of the Diet.

This section of The State of Food and Agriculture 1993
reports on the current situation of Japanese agriculture, the forces being
exerted both for and against change and the problems that must be faced and
overcome as Japanese agriculture is further integrated into the international
trade and economic system leading up to the twenty-first century.

Setting. With a total land area of 378 000
km2, Japan is larger than Italy but smaller than Sweden and Thailand.
It is largely mountainous and abundantly forested, more rugged and precipitous
than most of western Europe and has rivers that flow more rapidly. Situated in
the southern part of the temperate zone, the climate ranges from subtropical in
the south to much colder conditions on the northern Hokkaido Island where severe
winters are common. Approximately 70 percent of Japan is mountainous with only
14 percent of the total land area devoted to agriculture, of which slightly more
than half is paddy field for rice production. With 124 million people, Japan has
the fourth largest population in Asia and the Pacific.

The Japanese political system is a bicameral parliamentary
democracy. The government is highly centralized with executive power vested in
the Cabinet headed by the prime minister, the leader of the parliamentary
majority. The Liberal-Democratic Party, which had held the majority in the Diet
from the postwar period until July 1993, had come under serious political
pressure from Japanese voters, including business and labour union leaders, who
wanted a drastic political reform, and farm groups who opposed liberalization of
the domestic agricultural market.

After decades of being the miracle economy of the
industrialized world, Japan is in the midst of a serious economic slow-down.
According to the World Bank Atlas 1992, GNP real growth for the period
1980-1991 averaged a strong 4.3 percent annually. Per caput income growth
averaged 3.7 percent annually during the same period. The weakening of the
economy, which began in the last quarter of 1991, led to a decline in GDP growth
to 1.8 percent in 1992 from 4.4 percent in 1991 and 5.2 percent in 1990.
However, estimated unemployment and inflation remained low at 1.9 percent and
2.2 percent, respectively.

Agriculture accounted for 2 percent of GDP in 1991, while 5.9
percent of the total population was counted as agricultural. Since 1988, Japan
has been the largest net importer of agricultural products, importing a value of
$29 billion in 1991.

The agricultural sector

Total agricultural land in Japan in 1991 was 5 204 000 ha, of
which 2 825 000 ha, or 54 percent, was paddy field. Since 1975, agricultural
land has been declining in favour of non-farm uses at an average annual rate of
about 22 000 ha, almost all of which has been taken out of paddy production. The
number of farm households dropped from six million in 1960 to 3.7 million in
1992 (9 percent of total Japanese households) and is expected to decline further
to less than three million by the year 2000.

Another distinguishing characteristic of Japanese agriculture
is the small size of landholdings per farm household. Of all commercial farms in
1991, fully 58 percent were less than 1 ha while only 13 percent were more than
2 ha in size. But the size of holdings tells only part of the story.
Landholdings are also very fragmented, with a single household's landholdings
scattered around a farm village in a complicated system of cross-holding to
reduce the risk of total crop failure. For example, of the country's 2.7 million
ha of paddy land, while 50 percent are consolidated in plots of 0.3 ha or more,
only 3 percent are in plots of 0.5 ha or more. The target is to enlarge their
size to an average of 1 ha or more during the next ten years. In effecting land
consolidation and restructuring, the removal of berms and the reconstruction and
levelling of paddy fields into larger sizes is a labour- and
investment-intensive operation.

Of the 3.7 million farm households in Japan, 23 percent are
classified as non-commercial, with the remaining 77 percent classified as
commercial. Of the 2.9 million commercial farm households, only 16 percent are
full-time farm households, while the remaining 84 percent are classified as
part-time. Part-time farm households fall into two categories: Type I
households, which receive more than 50 percent of their income from farming, and
Type II households, which receive less than 50 percent of their income from
farming. Type I farm households account for 19 percent and Type II for 81
percent of part-time farms. Thus, of the 3.7 million farm households in 1992,
only 897 000 were commercial, engaged either full time or part time in farming
and with more than 50 percent of their income (Type I) derived from farming.
Moreover, only about 7 percent of the income of Type II farm households comes
from farming, with the rest coming from non-farm sources. This means that the
actual amount of labour devoted to farming has declined much more dramatically
than the decline in the number of farm households would suggest.

Some basic trends related to the agricultural sector include
the decline of agriculture as a portion of total GNP; continued rural-urban
migration; an ageing population of farmers with few new entrants; and a
relatively slow increase in average farm size. In fact, the labour shortage in
agriculture has become acute. Today, 4 to 5 percent of the land classified as
agricultural is idle, mainly because of a lack of labour. New graduate entrants
to agriculture have declined rapidly and, at present, number only about 2 000
per year. The reasons are lower per caput income in agriculture; harder work and
more onerous working conditions, including longer hours than those of urban
counterparts; and the uncertain outlook for agriculture, exacerbated by the GATT
talks and external pressures to liberalize. In addition, in the more remote
areas young women tend to migrate to the city, making it difficult for the young
men who remain to find wives. While farm household disposable income is 133
percent of non-farm household disposable income, per caput disposable income is
only 92 percent, since farm households comprise more members than non-farm
households.

Agricultural marketing policy

One of the main instruments of Japanese agricultural policy is
the Staple Food Control System, administered by the Food Agency of the Ministry
of Agriculture, Forestry and Fisheries. The objective of the Staple Food Control
System is to control the supply, based on estimated demand, and the price of
rice, wheat and barley. Although the bulk of staple grains are sold through
collectors and agricultural cooperatives directly to wholesalers rather than to
the government, the whole system is controlled by the Food Agency.

The mechanisms for controlling rice differ from those for
wheat and barley. Japan is self-sufficient in rice, its major staple food,
whereas it is far from self-sufficient in wheat and barley. Direct quantitative
control of supply is applied to rice. Under the Food Control Law, an annual
basic plan is drawn up to project the next year's rice demand, and supply is
then adjusted to meet that demand through the use of production controls,
including crop diversion. Each producer must then sell a specified quantity of
rice to the government for the purpose of stabilizing volume and price.
Standard-priced rice is government rice sold through registered wholesalers and
retailers, with the government setting the maximum price that can be charged to
the consumer. Standard-priced rice is a standard-quality rice sold at a lower
price than voluntary marketed rice (VMR) to meet market demand.

VMR, which was instituted in 1969, still comes under
government control. While the government sets the price for its rice purchases,
the price for VMR is negotiated between national collectors' organizations and
wholesale organizations. In order to overcome the lack of transparency and the
rigidity of the pricing mechanism, VMR exchanges were established in August 1990
in two locations (Tokyo and Osaka), and the rice marketed through those
exchanges is sold by tender.

Annual rice consumption in Japan is approximately 10 million
tonnes. As 3.5 million tonnes are consumed by producers, 6.5 million tonnes are
sold into the market and 2 million of these are purchased by the government as
standard rice and for market control. The remaining 4.5 million tonnes are sold
as VMR, of which 1 million tonnes are sold by auction at the Tokyo and Osaka
exchanges. The auction price is allowed to fluctuate by approximately 7 percent
between established maximum and minimum prices. This is the VMR price discovery
mechanism. Rice distributors estimate that 2 to 3 million tonnes of rice flow
through the "open under-the-table market", or open black market, with most of
the remainder flowing through the agricultural cooperatives directly to rice
wholesalers and on to the retail market.

A growing market economy in rice distribution has been
exerting its power in many ways, even though the food control law is still in
force. In the face of a declining demand for rice, growers are increasingly
producing high-quality rice for regional brand names and high-quality products.
Organic rice, i.e. rice produced without chemicals, whether they be pesticides
or mineral fertilizers, can be sold directly by farmers to consumer groups under
contract. In addition, private mail order systems have been developed to deliver
rice directly from farmers to consumers in remote cities.

Since rice carryover stocks have declined in recent years, the
government has relaxed the production adjustment control scheme in order to
obtain sufficient stocks for market control and provide enough standard-quality
rice to the retail shops.

The mechanism for controlling the wheat and barley markets is
indirect with a guaranteed minimum producer price. While it is not a
requirement, domestic producers sell virtually all their wheat and barley to the
government. The government sets the purchase and sale prices and agricultural
cooperatives are encouraged to negotiate quantity distribution contracts with
end-users. The Food Agency purchases domestically produced wheat at a subsidized
producer price that is substantially higher then the price it charges to
processors. Based on projections of requirements, each week the government
issues licences through the Food Agency for wheat and barley imports, thus
maintaining market stability. The Agency is the sole buyer of imported wheat and
barley.

Agricultural cooperatives. Agricultural
cooperatives are pervasive in the lives of Japanese farmers. There are two types
of agricultural cooperative: the multipurpose type which engages in marketing
farm products, input supply, credit, mutual insurance, processing, advisory and
other services; and the single-purpose type which concentrates on marketing the
products of certain specialized sectors such as fruit, vegetables and livestock
products.

There are three tiers to the organization of these
cooperatives: the local-level cooperatives; the prefectural cooperative
federations, which specialize in various kinds of services such as credit,
savings, marketing, purchasing and insurance; and the national cooperative
federations.

The national tier includes: the Norinchukin Bank which, with
50 percent of farmer savings, ranks number one in deposits and credits; the
Zenkyoren National Mutual Insurance Federation of Agricultural Cooperatives; a
medium-sized insurance company; an import and export trading firm; a national
medical and welfare federation; a national press and information federation; a
publishing house; a tourist corporation which ranks sixth in the country; and
the National Federation of Agricultural Cooperative Associations (ZEN-NOH), a
conglomerate which ranks eighth among Japanese trading companies and involves
about 140 companies and affiliates with annual sales of around $60 billion, as
well as the federation's policy-making body and political lobbying arm, the
Central Union of Agricultural Cooperatives (ZENCHU). The agricultural
cooperative structure has been described as giving cradle-to-grave service to
its members as well as having a powerful political influence via the ruling
party over government policies affecting agriculture.

Farmers constitute the regular members of the cooperatives who
have voting rights. There is also a non-voting associate member class for
non-farmers who want to take advantage of cooperative services. While almost all
farmers are members of the cooperatives, associate members number about
one-third of total membership. Farmer members have declined (from 5.9 million in
1970 to 5.5 million in 1990) while associate members have increased (from 1.3
million in 1970 to 2.9 million in 1990). Employees of the multipurpose
cooperatives number about 300 000; that is, one employee for every 18 farmer
members.

The government implements much of its agricultural policy
through the cooperative system. When agricultural products are covered by
government price support subsidies, the subsidies are paid to the producers
through the cooperatives. In addition, the rice land diversion programme
(through which one-third of paddy land has been diverted to other crops, since
the per caput consumption of rice fell from a high of 118 kg in 1962 to 70 kg in
1989) is implemented at the local level by the cooperative system together with
the administrative authorities. In 1989, about 95 percent of rice, 96 percent of
wheat, more than 90 percent of barley and more than 50 percent of fruit,
vegetables, beef cattle and milk was marketed through the agricultural
cooperative system. In addition, on the input supply side, more than 90 percent
of fertilizer, 70 percent of farm chemicals, 64 percent of petroleum used on
farms, 50 percent of farm machinery and 40 percent of feed was purchased from
the cooperative system.

The cooperatives do not compete with each other at the local
level and the system operates according to egalitarian principles. Farmers often
have little alternative but to sell to the local agricultural cooperative and
are likewise pressed to buy inputs from the cooperative. Given the
egalitarianism, large farmers cannot receive significant favourable returns from
their cooperatives, such as volume discounts for inputs or volume premiums for
sale of their products, which they usually expect from rural commercial firms.
Thus, they cannot benefit from economies of size in their marketing or input
purchasing activities.

The agricultural cooperative system is having to adjust
rapidly to a new set of realities. In addition to financial problems related to
the slowing of the general economy and financial deregulation, the volume of
agricultural products flowing through the cooperatives is declining. There is a
tendency for larger producer members to shift from their traditional marketing
channels through cooperatives to others, including direct marketing to
consumers.

Local cooperatives are being merged and consolidated with the
aim of reducing the number of general purpose cooperatives to about 1 000, less
than one-third of the present number, by the year 2000. In addition, integration
of the prefectural federations with the national federations is being considered
as local-level cooperatives are consolidated.

Beef market liberalization. After protracted
negotiations, Japan decided to end the quota system on beef imports in 1988. The
quota system was replaced by tariffs which began in 1991 at 70 percent ad
valorem, dropping to 60 percent on 1 April 1992 and to 50 percent on 1 April
1993. Beef stocks increased because supplies, including imports, exceeded demand
in 1989 and 1990 before returning to 1988 levels by early 1992. During this
period, the price of high-grade beef, including Wagyu beef, remained relatively
stable while the low-grade price, that is for dairy beef, dropped by about 25 to
35 percent, depending on the grade. In addition, there was a dramatic shift in
demand from frozen to fresh and chilled beef. The high-grade beef price has
dropped recently, mainly because of the tightening of the economy.

Since the major impact of liberalization was on the relatively
low-grade beef coming from the dairy herds, dairy farmers were the most severely
hurt. While milk prices were unaffected, the price of dairy beef calves sold to
feeders dropped significantly.

To help compensate for the dairy producers' losses, the
government provides deficiency payments to cattle feeders. Feeders are expected
to pass these payments back to dairy producers by paying higher prices for their
feeder calves. Still, since the liberalization of the beef market, the number of
dairy farms has decreased by 20 percent. Interestingly, however, the size of the
national dairy herd has not been reduced, so a considerable consolidation of
dairy herds has been achieved in the process.

The liberalization of the beef market has lowered domestic
prices and introduced a market competitiveness to which Japanese farmers have
responded by aiming for quality. Dairy beef feeders welcome the lower calf
prices, while the government subsidizes the calf prices paid to dairy farmers by
the feeders with deficiency payments.

Per caput beef consumption in Japan now stands at 6.2 kg per
year, with the rate of increase having slowed from 10.9 percent in 1989 and 1990
to 1.6 percent in 1991.

Agriculture and the environment

Throughout Japan's history there has been a close relationship
between water management and agriculture. Japan has rapidly flowing rivers
because of its very steep mountains and there is consequently little pollution
buildup in the rivers. However, at the outlets of the rivers, pollution is
beginning to appear in the sea. Agricultural pollution comes mainly from
agricultural chemicals and fertilizers and animal husbandry wastes. Paddy
comprises just over half of the total cultivated area and acts as a reservoir,
filtering water to the groundwater level. On uplands, nitrogen fertilizer
becomes nitric acid. On paddy, there is no oxygen so nitrogen fertilizer is
transformed into ammonium which is fixed in the soil while some nitrogen is
released as gas. Thus, there is noticeably more chemical- and fertilizer-induced
pollution of groundwater in upland areas than in paddy areas.

Japanese Government policy first addressed sustainable
agriculture in FY 1992. Sustainable agriculture is defined by the country's
Ministry of Agriculture, Forestry and Fisheries as agriculture using lower than
normal inputs of chemicals and fertilizer. It must meet two basic criteria:
sustainable yields and quality; and the reduced use of chemicals and mineral
fertilizer.

Two major technologies introduced to encourage sustainable
agriculture are time-release fertilizers and biological and integrated pest
management. Another means of insect control that has been used in Japan is to
lure male insects into a concentrated area by using the scent or sound of the
female insect and then disposing of them in that limited area.

Another programme being promoted by the Ministry of
Agriculture, Forestry and Fisheries is the recycling of animal waste. Animal
waste is processed into fertilizer under contracts between crop and livestock
farmers. The ministry helps by establishing facilities to process the manure, by
establishing demonstration farms and by providing extension services.

The incentive for farmers to engage in sustainable agriculture
at present is not so much an economic factor but rather more an altruistic
caring for future generations. There is technology evolving that should reduce
input use and costs. For example, there is now a rice transplanter with a
chemical applicator that puts the chemicals and fertilizer in close proximity to
the seedling, thereby reducing overall use.

The ministry is now concentrating on fruit and vegetable farms
where chemical use is the largest. In general, however, it instructs prefecture
governments to review and revise their fertilizer application and pest control
standards for the purpose of maintaining environmental quality.

New policy directions

Several factors and trends are converging at present and
leading to major structural changes in Japanese agriculture as well as to a
rethinking of agricultural policy. The more important of these factors are the
following:

· The strengthening
of the Japanese yen, which means that agricultural imports are less expensive
and will continue to increase.

· The depopulation of rural
areas, the deterioration of rural infrastructure and the loss of amenities as
the number of farm successors and new entrants decline and the ageing of the
farm population accelerates because of lower incomes, hard work and long working
hours as well as more favourable job opportunities outside farming.

· The declining demand for rice,
resulting in the conversion and abandonment of paddy fields which, in turn, has
a deleterious impact on water quality and the environment.

· The small and fragmented
structure of agricultural holdings, which reduces or prevents farmers from
introducing cost-saving technology such as direct rice planting.

· The need to liberalize the
agricultural import markets further as the internationalization of agriculture
continues.

· The declining food
self-sufficiency ratio in terms of national calories supplied, which stood at 46
percent in 1991.

It is widely recognized that many current trends are
unfavourable to agriculture and rural areas. In view of the urgency of the
situation facing Japanese agriculture, the Ministry of Agriculture, Forestry and
Fisheries has begun a process of sectoral reform with a task force which, after
exchanging views with people and organizations nationwide, submitted its report,
The Basic Direction of New Policies for Food, Agriculture and Rural
Areas, in June 1992. The report spells out structural targets and, as
previously stated, provides broad guidelines for the reform of the agricultural
sector and the transformation of rural areas. New laws and budgets are being
proposed to achieve a comprehensive reform over a ten-year period.

Under the new policy, the structural targets - which
constitute the heart of the plan to make Japanese agriculture more efficient and
competitive - relate to the size of holdings and the form of management. At the
end of ten years, the target is to have 300 000 to 400 000 individual farm
management bodies (single farm households), 150 000 of which will be engaged in
rice cultivation, including 50 000 in single-crop rice farming with 10 to 20 ha
and 100 000 in multiple-crop farming (including rice) with 5 to 10 ha. In
addition, there would be 40 000 to 50 000 organized farm management bodies
(management associations of several types, including agricultural producer
cooperatives, small-scale corporations and agricultural production associations)
managing single-crop rice holdings of 30 to 50 ha.

As part of the implementation of the new policy, new laws that
were passed in 1993 provide for each community to set its goals for agricultural
reform under the policy and to determine how to organize itself, e.g. into an
individual cooperative or a limited partnership, in order to increase the size
of farm management holdings. In the end, more than 3 000 municipalities will
govern the reform along the lines of their own objectives, with the national
government supporting their decisions with price and structure policies. The
necessary budget has been appropriated in FY 1993 for carrying out this policy
at national, prefectural and municipal levels.

The future envisioned for Japanese agriculture and rural
communities will require enormous investments, and many difficult problems will
have to be solved. The price of farmland in the area covered by the Urban
Planning Law is extremely high. The law concerning reserved farmland in the
urbanization promotion area was revised in 1991 and aims at promoting the
conversion of farmland for urbanization and at easing the pressure on land
prices and on the housing market. Formerly, farmland was protected from
urbanization and was valued for tax purposes as agricultural land, thereby
giving farmers a major tax break. Under the new law, farmers in the urban fringe
can declare their land either agricultural or ready for urban development. If
they declare their land agricultural, they must do so for 30 years, in which
case they are eligible for the lower agricultural tax rates. If they declare the
land ready for urban development, they will be taxed based on the higher urban
market price. This should ease farmland prices and rental values, at least for
the 1 percent of total farmland affected by the law.

The tradition of ownership and cross-holding is also a
constraint to increasing the size of farms. Prefectural corporations for land
aggregation and farmland development purchase land and rent or sell that land to
other farmers in an effort to accelerate land consolidation and the increase in
farm sizes. These corporations are likely to be used by the Ministry of
Agriculture, Forestry and Fisheries to help implement the new policy. This would
mean that the ministry would infuse the corporations with rather large amounts
of funding in order to accelerate their ability to purchase and resell or rent
agricultural properties.

Some analysts suggest that the government plan to incorporate
a number of farms into a single legal entity, such as a limited partnership, may
meet with limited success, even though there are already 3 800 agricultural
production corporations in existence. If all of the shareholders are family
members, it may work - at least for the first generation - but non-family
members may not be willing to subject themselves to others managing their
property. However, there is an agricultural committee system responsible for the
administration of farmlands under ministerial direction. There are committees in
each of the prefectures which, in turn, have a network of committees at the
municipal level. These agricultural committees appear to have a major function
in observing the terms of sale and rental of farmland in each of the various
municipalities and communities in Japan. The agricultural committees, the
technical advisors in the agricultural cooperatives and the agricultural
extension officers are likely to be consolidated into a comprehensive system in
each jurisdiction. This system would then become the focal point for the
promotion of family and non-family corporations or limited partnership farms and
for promoting the full use of agricultural land. The latter will obviously be an
attempt to incorporate the land that is now held by Type II part-time farmers
into more serious production units.

Progress made in achieving the objectives of the new policy
would help Japanese agriculture operate in a global economy. The enlargement and
consolidation of paddy fields would lower labour inputs and improve rice
production efficiency. The direct seeding of rice rather than transplanting
would allow a huge decrease in labour input, from 50 hours to produce 0.1 ha of
rice down to five hours. This, along with other economies of size that could be
realized under the new policy directions, could reduce production costs by more
than 50 percent.

However, some large and powerful political forces are
resistant to change. Past attempts to decentralize government activities and to
reduce the role of government, including in the agricultural sector, have been
opposed by state employee labour unions. The cooperative system's employee
labour union also views the status quo as the best protection of their own
interests. The strong resistance to change in Japanese agriculture amounts, in
part, to a labour issue involving both government and agricultural cooperative
employees as well as farmers. This issue will need to be resolved in order for
the full reforms visualized in The Basic Direction of New Policies for Food
Agriculture and Rural Areas to be achieved.

Having begun the reform of its agriculture during a period of
weakened general economic activity, the necessary steps for reform will be more
difficult to implement than they would have been when the economy was booming.
The recent slowing of the general economy will at least make the allocation of
the necessary investment funds for agricultural reform more difficult. The
reforms suggested in the new policy report represent a massive undertaking for
the planned ten-year period but the Japanese Government has taken the initial
legal and budgetary steps to effect the indicated reforms and appears committed
to seeing them through.